Q3 2001 Industry Update

PC Market

In June, there were some signs that things could be picking back up in the market, with several motherboard makers indicating that orders were increasing for P4 motherboards, and Athlon motherboard sales were still strong. July failed to live up to the promise, as the anticipated increase in demand never materialized. August again provided some hope, as some of the larger manufacturers claimed they had a record month in shipments, but then September hit, along with a variety of serious economic blows.

On Sept 10, Intel launched their i845 chipset to a largely unimpressed marketplace, however the next day dawned as one of the most horrific that many of us will ever remember. The effects upon the industry, and the economy in general, are still being felt and likely will be for some time to come. Only now are many people beginning to get back to a normal lifestyle, and many have realized that there are better ways to spend money than on computer components, or other entertainment items. In addition, strict security measures prevented or slowed many products shipments into the U.S. for weeks, including processors (which are largely packaged in Malaysia), motherboards, video cards, sound cards, DRAM and other components from Taiwan, Japan and Korea, amongst others.

To make matters worse, several days later Typhoon Nari hit Taiwan, causing flooding the likes of which has not been seen for decades, if not centuries. Very hard hit were the production facilities of many manufacturers, causing problems not only with trying to produce finished products, but with rising component inventories due to the manufacturing stoppage.

All of this has caused a great deal of concern in the industry, because it has created uncertainty about the causes for the lack of sales. Would we have seen a return to more normal seasonal buying patters, or is it really a permanent shift in buying patterns by the general public? Though some manufacturers catering to niche markets continue to see decent sales, the mainstream manufacturers and OEMs have been seriously affected.

Though many have pointed to the September 11 events as the reason for poor Q3 performance, the larger OEMs were already taking steps to reduce their costs by consolidating their product lines, including IBM, Micron and most recently Gateway. These consolidations included dropping AMD processors for all but select lines of computers. However, despite the publicity, industry observers have said that this likely affects less than 5% of AMD’s sales.

The biggest news was the parting out of Compaq during the summer. On Aug 1, the Alpha design group was transferred to Intel for some undisclosed considerations, and then on Sept 4 the big news broke that HP had acquired Compaq in a $25B stock swap deal. Both of these announcements stunned observers with the potential impact on the industry. The Alpha deal seemed to signal the final end of the old DEC regime, and one of the premier RISC processor designs. The HP deal created a computer company to rival IBM in size, but many questioned the logic of the move. Later reassessment has brought more positive comments, but some were concerned that the inevitable consolidation of product lines would impact AMD once again. However, JCs PC News posted a rumor, stated to be from a knowledgeable source, that HP/Compaq and AMD had forged some type of relationship that would benefit AMD. Whether this means a high-profile system branding for Athlon processors in both the commercial and consumer space remains to be seen, but that would be a very big win for AMD, if true.

VIA recently released their September revenues, which were 26% below the same period last year. This follows a 26% drop in August and a 9% drop in July. While still up 14% for the year over 2000, they reduced their sales forecast for 2001 by 25%. AMD has also indicated they will have a greater than expected loss in Q3, even though processor shipments remained about the same as in Q2, due to lower prices and a weak flash market. On the other hand SiS has reported an increase of over 50% versus last year because of the strong sales of processor and graphics chipsets. It is unknown as of the time of this article how Intel was impacted.

DRAM manufacturers have also been very hard hit in this market, with Micron recently posting a loss of over $500M this past quarter, and NEC reportedly losing over $1B for the fiscal year. Hynix was recently bailed out of serious financial trouble by the Korean government, despite a cry of ‘foul’ by Micron. Infineon and Toshiba have both been mentioned as also being in trouble financially, and there have been rumors of a merger between the two. We can probably expect to see some major consolidation in this market over the next year or so, as the outlook does not appear to be getting better for the short term.

The question on everyone’s mind now is whether the release of Windows XP and processors/chipsets released over the next 6 weeks or so will generate any increased sales, or if they too will be snubbed by consumers in this marketplace. If the latter occurs, there could be some wholesale panic in the tech industry for awhile, and some consolidations in segments other than DRAM and Box makers.